Gold is Store of Value and Critical Hedge as Currencies Race to the Bottom

Release Date: 
Friday, November 13, 2015

Gold and Silver Prices
Gold prices were largely range bound this week with some modest support coming from tepid economic news.

“Gold prices are trading modestly higher in early U.S. trading Friday, in the immediate aftermath of some downbeat U.S. economic data. Short covering in the futures market and bargain hunting in the cash market are featured after recent downside price pressure that saw prices Thursday fall very close to a 5.5-year low.

“U.S. retail sales for October came in at a paltry gain of 0.1%. A gain of 0.3% was expected. Meantime, the October U.S. producer price index came in at minus 0.4% when a rise of 0.2% was expected. Gold prices were trading near steady and the popped to the session high right after that data was released. However, prices quickly backed off from the daily high.” (“Gold Gets Modest Lift From Weak U.S. Economic Data,” Kitco News, 11/13/15.)

Gold finished the week down $5.50, closing at $1,084.40. Silver prices closed the week at $14.31, down $0.46.

Gold is Store of Value and Critical Hedge as Currencies Race to the Bottom – Ing
John R. Ing, President & CEO at Maison Placements Canada Inc., warns investors of the threats to the U.S. dollar and the importance of gold as a store of value and hedge against fiat currencies.

“Seven years after the Lehman collapse, the US has added nearly $8 trillion of debt, doubling its debt-to-GDP ratio. But now that gap has created problems among the cartel of central banks because most currencies are linked to the dollar. Central bankers were once bankers to the banks, however those stewards of money have become creators of money. Those imbalances also triggered a return to a currency war, reminiscent of the Thirties with a race to the bottom as each country sought a competitive advantage. The world’s financial system has become more unstable…

“The United States, the world’s largest borrower has become increasingly dependent upon its creditors. America’s debt holders have noticed and some like China are dumping dollars as China discovered that quantitative easing reduced returns on its massive dollar denominated reserves to near zero…

“Russia and China have been buying gold and central banks from France to Germany are repatriating their gold, from New York and London vaults back to their domestic vaults. We believe the underlying trend of course is the distrust in currencies after the global economies aggressively printed fiat money, devaluing its value. At the same time, there is concern about those dollars. The price of gold is both a rival and linked to the value of the dollar and it lies outside the dollar denominated banking system. Of concern, is that eras of large-scale, uncontrolled financial booms and busts have been seen before, in the Thirties, late Seventies and of course 2008. Gold was always a good hedge to have…

“The greatest anxiety is not that money is made of paper but its lack of substance or store of value and the supply is elastic. That said, central banks, investors and Chinese grannies are buying gold as a safer bet than the dollar. For three thousand years, gold has retained its value. Gold’s value is derived from investors’ perception of what it is worth and which no country can control. Moreover, gold is a barometer of investor anxiety. To be sure, in a world of zero interest rates, the low yield on gold matters little, particularly, when interest rates in most countries are negative. Experience indicates that gold’s rise this summer shows investors are nervous, particularly when so much fear stalks the world.” (“Gold: House of Cards,” 11/12/15.)

Central Banks Buying Gold At Near Record Amounts
Bloomberg Business reported that central banks diversified their reserves with gold at near record levels in September.

“Central banks and other institutions boosted gold purchases to the second-highest level on record in the quarter to September as countries including China and Russia sought to diversify their foreign-exchange reserves…

“Central banks will probably remain net buyers as emerging-market institutions continue to boost their allocation, while developed countries are reluctant to sell, Barclays Plc said in an Oct. 21 report. ‘Diversification of reserve assets, especially among developing nations, remains the primary motivation for this increase in official gold reserves, as many recognize that the economic and geopolitical outlook continues to look far from certain,’ the council said…  (“Central Banks Snapping Up Gold at Near-Record Pace, Council Says,” Bloomberg Business,” 11/11/15.)

In related news, “[l]ow gold prices in the third quarter attracted bargain hunters the world over, with U.S. buyers grabbing far more coins and bars than they did in any other quarter over the past five years… Third-quarter U.S. demand for bar and coins in particular was up 207 percent from a year ago to 33 tons, the highest level since 2010.” (“Bargain hunters send US demand for bars, coins up 207%,” CNBC, 11/13/15.)

US Banks Hold $10 Trillion in Risky Trades – Financial Times
London’s Financial Times reports that recent changes in bank regulation have left U.S. banks holding $10 trillion worth of risky trades threatening the U.S. financial system.

“The repeal of part of the Dodd-Frank financial reforms has left big US banks holding $10tn of “risky” derivatives trades on their books, according to an investigation by Democrats. Senator Elizabeth Warren, a liberal Wall Street foe, said the repeal — which sparked a firestorm when it was slipped into a budget bill in December 2014 — had left federally insured banks exposed to dangerous swaps trades…

“Sheila Bair, former chair of the Federal Deposit Insurance Corporation and now president of Washington College in Maryland, told the FT earlier this year — before she joined the school — that the swaps repeal was a ‘classic backroom deal.’  ‘There’s no way this would have passed muster if people had openly debated it, so [the banks] had to sneak it on to a must-pass funding bill. For an industry that purports to want to regain public trust, it was an extraordinary thing to do.’” (“US banks said to hold $10tn of ‘risky’ trades,” 11/10/15.)

IMF Warns Next Financial Crash Is Coming
The International Monetary Fund warned the world economy is moving towards another global financial crash reports the Guardian newspaper.

“The next financial crisis is coming, it’s a just a matter of time – and we haven’t finished fixing the flaws in the global system that were so brutally exposed by the last one. That is the message from the International Monetary Fund’s latest Global Financial Stability report, which will make sobering reading for the finance ministers and central bankers gathered in Lima, Peru, for its annual meeting…

“Meanwhile, the failure to patch up the international financial system after the last crash, by ensuring that banks in emerging markets hold enough capital, and constraining risky borrowing, for example, means that a new Lehman Brothers-type shock could spark another global panic…

“The IMF’s warning echoes a chorus of others. The Bank of England’s chief economist, Andy Haldane, has argued that the world is entering the latest episode of a “three-part crisis trilogy”. Unctad, the UN’s trade and development arm, would like to see advanced economies boost public spending to offset the downturn in emerging economies. The Bank for International Settlements believes interest rates have been too low for too long, encouraging too much risk-taking in financial markets. All of them fear that the global financial system is primed for a crisis.” (“Next financial crash is coming – and before we've fixed flaws from last one,” The Guardian, 11/7/15.)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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